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While the Real Estate (Regulation and Development) Act (RERA) has mandated that developers have compulsory title insurance, it is imperative to understand why the issues related to unclear land titles, have not been addressed. It also needs to be seen, whether RERA can fix what has been a grey zone for both, the developers and home buyers. Title insurance can be a much-needed safety mechanism for home buyers, in a country where numerous properties across cities lack clear titles – the legal recognition of land ownership. Inaccurate, misplaced and old records, routinely spark litigation over the ownership of land. There have been instances, where people buying apartments and living in the units for as long as 40 years, have suddenly been told that the land belongs to the forest department. In such a scenario, title insurance could definitely help home owners.
The problem is that unlike the UK and the US, where the land records are digitised, in India, land records are not easily accessible due to lack of digital infrastructure. Moreover, as land is a state subject in India, who will take the onus of due diligence? Experts, licensed by the government, are needed to address issues like legal capacity of the seller, nature of rights over the property, rights of the current owner, legality of construction, encumbrances, etc.
What is title insurance?
Title insurance is an insurance for property buyers, against loss (and settlement costs, litigation funds, etc.) arising from problems in the title of the land that could surface, after purchase. Unlike other insurance products that insure the client for future eventualities, title insurance covers the buyers against past defects, like forgery/fraud/impersonation, failure to transfer conveyance, unpaid taxes on the date of taking the cover and documents improperly created or executed.
The loss provision can also cover legal defence costs, out-of-court settlements with the competing claimant, or court/tribunal verdicts. If property value appreciates, the policy is endorsed, to increase the limit of indemnity. Title insurance also safeguards the consumer with legal protection, to ensure that the developer honours his commitments.
Title insurance requirements under the RERA
Insurers in India do not cover land transactions, as yet, because of unreliable title. There is no guarantee of clear titles, even for land bought in government auctions. The real estate act mandates developers to obtain the requisite insurance policies, so as to secure the development of a project. As per Section 16 of the RERA, the promoter shall obtain all insurances including title of the land, construction of the real estate project and obligations in case of a transfer. The premium has to be paid by the promoter, before transferring the title. This is for projects larger than 500 sq metres in area and exceeding eight flats. The benefit of the insurance, has to be passed on to the buyer at the time of sale. The developer must provide a written affidavit to the buyer, stating that the legal title to the land contains legitimate documents of ownership.
How title insurance will affect the real estate sector
Title insurance can help in boosting the image of the sector, as it would instill confidence in the minds of the buyers. It will also act as a due diligence mechanism for home finance institutions. Analysts believe that the availability of title insurance, will also encourage private equity investment in Indian real estate, as global investors are very particular about clear titles. There will be increased interest in the sector, once such a framework in place and this will be a win-win situation for all the stakeholders.
Surendra Hiranandani, CMD, House of Hiranandani, points out that most developed countries follow a system of ‘conclusive titles’, which allows for certainty of the title for the land in question. While registration of a title gives a definite right to the owner of the property, the availability of title insurance offers an additional layer of protection, vis-à-vis the title ownership of the buyer, he adds. “At present, none of the property transactions, be it large acquisitions or a simple sale of a land or a flat, are covered through an insurance policy by any Indian insurer. The reason is that any title can be challenged and the courts do not accept government records, title reports or agreements as definitive,” points out Hiranandani.
How will title insurance affect property prices?
Nikhil Hawelia, managing director of the Hawelia Group, maintains that while the RERA mandate is good news for developers and home buyers, implementation remains the concern. “No serious developer would like to get into a situation where, tomorrow, his brand equity is damaged, because his past land title was challenged.
“I also have serious doubts, over which insurance company will offer this insurance in today’s market, where the land titles remain vague even to the government agencies. Moreover, what would be the cost and will property prices go up, as developers will add this to their input costs?” Hawelia questions.
It will take time, before insurance agencies find a viable business model in title insurance. As of now, general insurance companies including state-owned National Insurance Company (NIC), SBI General and HDFC Ergo, are eyeing products in this segment but the modalities are yet to be worked out. With the kind of risk involved, the insurers may also ask for hefty premiums. The premium for the coverage, is likely to be based on the gross developed value (which includes value of land, cost of construction and profit margin of the developer), while the policy will be long-term, ranging between five and 12 years.
At present, the extent to which title insurance will succeed and how much it will benefit the sector, remains unclear.
Title insurance in Indian realty: Challenges
- While the RERA makes title insurance mandatory, its implementation roadmap remains unclear.
- With land records not digitised, due diligence for title insurance will be a huge challenge.
- With high risk involved, the higher cost of title insurance may escalate property prices.
(The writer is CEO, Track2Realty)